Unintended consequences of China’s wine tariffs

There is no denying China continues to be the most valuable market for Australian wine and further, that wine sales to China are critical for wineries in Australia which wish to ensure that their global strategy is working, given that more than 60 per cent of the wine produced in Australia is exported.

According to AUSTRADE (Australian Trade and Investment Commission) Australia is China's second largest supplier behind France. Red varieties continue to dominate both sales and exports. More than 96 per cent of Australian table wine exported to China is red. Chinese middle class consumers are the main market for higher value Australian wines. Their importance lies in their long-term, stable purchasing power, brand awareness and as opinion leaders.

Because Chinese mostly drink red wine, China is now the world's largest market for red wine. China's consumption of red wine has grown by 136% since 2008, whereas it has declined by 18% in France, the second-largest consumer.

The data from Wine Australia shows exports shrugged off a pandemic downturn to be valued at $2.99 billion in the year to September, up 4 per cent on last year. China, the most lucrative market for Australian wine, increased its spend by 4 per cent to $1.17 billion. However, the volume of wine sold to China dropped by 12 per cent to 123 million litres.

In August, China announced it had launched an investigation into allegations that Australia dumped wine in China and subsidised its winemakers which left a sour taste on the Australian winemakers' palate. Now, China has hit Australian winemakers with a second trade strike in the latest escalation of the bilateral row.

The wine trade with China is highly contestable and Western nations have been warned they need to work collectively to stop Beijing using economic coercion to pick them off one by one.

When China's ambassador to Australia, Cheng Jingye, warned in The Australian Financial Review in April that beef and wine exports, tourism and education could be targeted because of the Morrison government's pursuit of an inquiry into the coronavirus pandemic, it was more than a shot across the bow of the wine industry in Australia.

My conversations with Australian winemakers up until the latest tariffs was that the consensus in the industry was that they must do whatever it takes to appease the Chinese wine import market. 'How dare the Australian government criticise the Emperor's new clothes?' seems to be an edit coming out of the mouths of many winemakers. Until now.

There is now a lot of scepticism amongst winemakers as to the real reason why China launched an investigation into whether Australian winemakers are flooding the country with cut-price plonk and drowning out local producers. Many are asking for proof and validation but even if it were given, the reliability of data coming out of Communist China is treated as being sanitised and skewed in favour of the Chinese claims.

The Australian Prime Minister rejected any suggestion that there has been any dumping of Australian wine in China saying there was no evidence to support that claim, and instead he made the point that Australian wines were the second most expensive in China.

In Australia, many have struggled with purchasing certain premium quality wines only to be told by their local bottle shop that they have been exported to China. So, claiming that Aussie winemakers are 'dumping' seems baseless.

As a student of economics, I am of the view that the impacts of coercive diplomacy are exacerbated by the growing dependency of foreign governments and companies on the Chinese market – especially for wine. The proverbial 'shot across the (Australian wine industry) bow' has sent a new message to the industry – diversify, seek new markets and, in my view, increase the price of premium wines and let the Chinese consumers pay the price.

There is every indication that the relationship between China and Australia regarding wine has indeed 'soured' (pardon the pun) to the point that if it continues, the relationship will be well and truly 'corked', forcing Australian winemakers to concentrate on the USA and English markets.

My predication, however, is that China regrets their predatory tariff move given the fact that there are limited worldwide producers which can supply the wine quality that Australia does – where else can you get a Barossa Valley Shiraz with the quality of fruit and structure that say a John Duval wine exhibits? Nowhere – except the Barossa. So, if the Chinese consumer market starts knocking on the doors of Australian winemakers demanding our wines, then they may be in for a rude shock if our wines have found a new market resulting in shortages of premium wines.

The question remains: 'to what extent can we blame the Australian government for failing to 'engage' with China properly' considering COVID-19? The answer seems to be in the fact that the export threat came after Australia led international calls for an investigation into the origins of the coronavirus which is just one of a long list of diplomatic tit-for-tat points with China.

Whatever the prognosis, the Australian domestic market is resilient with reports from various government and private research sources confirming that the consumption of alcohol may have in fact risen under COVID-19 with on-line sales growing.

Whilst the initial impact of the anti-dumping investigation on producers saw a correction in the share prices of major wine producers, many like Penfolds, maintains that it remains committed to China as a priority market and will continue to invest in its Chinese business and its relationships with customers and consumers.

The tariffs ranging from 107.1 per cent to 212.1 per cent that would be imposed on Australian wine will result in unintended consequences for China.

The announcement on November 27 by the Ministry of Commerce in China on the anti-dumping investigation of wine originating from Australia lacks substance and specific details.

The assertion that there was dumping of imported wine from Australia with a subsequent negative impact on China's domestic wine industry is baseless as there are no reliable details to substantiate the effect on the Chinese domestic market.

The $1.3 billion a year in exports of Australian wine to China will result in higher prices for Chinese consumers and now force Australian winemakers to seek more opportune markets.

Tariffs can have unintended side effects making the Chinese domestic industries less efficient and innovative by reducing competition. They also hurt domestic consumers since a lack of competition tends to push up prices. Chinese importers will pass the costs of tariffs on to their customers which is indeed an unintended consequence of using tariffs to make political points.

The Australian wine industry is right to hold the view that it is 'surprised' by the timing of Chinese tariff move with sales peaking during the festive season. I have every confidence that the Australian wine industry will be the long-term winners in this era of tit for tat diplomacy.